Key advantages and drawbacks of blockchain

13 June 2018

We know what blockchain is – it is a public collection of ledgers recording the data about the actions performed by the participants of the blockchain network. Blockchain is praised for its decentralization and security features, but aren’t they overestimated? In our current post we take a look at some major benefits and implications of the technology.

Major advantages

No intermediary control

Intermediary control of databases requires a lot of efforts and entails high costs for the third-party entities responsible for the storage and processing of user information. Blockchain, being a distributed ledger having its own cryptographic algorithms with the synchronization among the nodes participating in the network, eliminates the need in centralized control of databases.

This feature is considered as an advantage as it mitigates the risks associated with central control of the information, such as tampering or forgery. Protocols regulating the operation of the blockchain network ensure that every block has the history of previous transactions and activities, and the blockchain has an inbuilt functionality to sort out and decline those blocks, which contradict the information contained in the entire chain.

Distribution

While many hi-tech companies prefer to bear high expenses on purchasing power for supporting the computer capacity for their networks, blockchain allows distribution of the power among its members, and each of the members may become an independent node by installing related software. Such a distribution on power also contributes to the security of the data, as that kind of systems are more difficult to bring down and hack.

No need in Clearing House

Conventional process of transaction processing requires the trust between the parties entering into a deal, and as such a clearing house or a bank to act as a mediator and keeper of records for the transactions. Blockchain eliminates the need in third parties as all records are kept in the distributed ledger, preventing the problem of double spending, an event, when someone tries to spend the same amount of money several times. The transactions are processed on the basis of specific consensus protocols, and the parties have no need in trusting each other, because they may easily check if the money sent is real and belong to the party.

Irreversibility

The transactions performed by the parties within the blockchain ecosystem are irreversible and, hence, cannot be undone. The transactions, once approved by the parties and the nodes coming to a consensus that the transaction is correct, are recorded into a distributed ledger and may not be reversed. This structure allows traceability of all transactions and funds and creates a potential for other applications of the blockchain, where the stakeholders need to trace the history of actions performed within the network.

Major disadvantages

Slow speed

Conventional systems take less time and efforts to process a single transaction, because all the information is kept in a centralized database, which is consulted, when the parties connect to each other. Once the connection is established, conventional systems may start processing. Blockchain environments require digital signatures assigned to each transaction on the basis of public-private cryptography scheme. This is explained by the process of distribution of a single transaction among the participating nodes, and without the digital signature the source of the funds or initiator of a transaction cannot be established and verified. In contrast, conventional systems do not require verifying every individual transaction every time.

The consensus mechanism, which is listed along the main advantages of the blockchain technology, may also become its weak point. Blockchain networks require the nodes to come to a consensus with respect to an action performed by the blockchain members to approve that action and record it as true and correct. The process may take a lot of time because of long communication between the nodes and the process of verification across numerous forks, which among other things may involve rollback of the information.

To crown it all, the transactions in the blockchain require processing several times, as all the nodes in the network should approve them, while traditional systems may process transactions one time or two times.

Expensive

Blockchain systems waste time and power for redundant operations to approve and come to a consensus, making the overall process too expensive, because each node in the network perform the same operation, wasting the electricity and time.

On the other hand, some networks may suffice nodes, which also makes the processing time and cost-inefficient. The limited number of nodes will charge higher fees for their service in view of low competition, and will process top-priority transactions first, which includes only those parties that pay more, thus, making other low-amount members to wait for a long time.